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N OV E M B E R 2 0 1 8

Bigger Can Be Better: Maximize Speed and Impact with Benefits-Based M&A

P O I N T O F V I E W

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POINT OF VIEW

Bigger Can Be Better: Maximize Speed and Impact with Benefits-Based M&A IRIworldwide.com

A quickly evolving competitive marketplace and rapid changes in how, where and why consumers make purchases have left many CPG companies struggling to produce consistent growth. Many large, traditional CPG companies are further challenged by a lack of products and processes to deliver against consumers’ most pressing needs and wants, such as natural, organic and authentic products. These are just some of the factors that have collaborated to spawn a merger and acquisition frenzy in the CPG industry.

According to a recent study by OC&C Strategy Consultants, the number of mergers and acquisition deals among the top 50 consumer goods companies reached a 15-year high in 2017, marking a 45 percent increase from the previous year. M&A for the sake of M&A, though, is not wise or fruitful. To win, CPG companies must invest in companies and brands that bring sustainable incrementality to existing portfolios.

Finding the just-right opportunity, though, is a daunting task – particularly in a market where speed is a key factor of success. Getting it right requires CPG companies to adopt a new lens: the lens of the shopper, a benefits-based lens. By examining potential M&A opportunities through an unbiased shopper perspective based on real-market views of what products are being purchased to satisfy the same need across a broad, cross-category landscape, CPG companies will quickly and accurately:

• Establish initial marketplace boundaries

• Understand and size the shopper-defined marketplace

• Pinpoint incremental long-term growth opportunities and build a fact-based business proposition

Executive Summary

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POINT OF VIEW


In today’s marketplace, there is no question that consumers are in control. They’re incredibly well-informed, thanks to the explosion of the internet and the proliferation of handheld access to that worldwide web of knowledge. They understand their options – their nearly limitless options – in what to buy, where to buy and from whom to buy. And they are spending their money on the products, stores and channels that best satisfy their needs and wants – their amazingly personal and rapidly changing needs and wants. The spectrum of essential product attributes has become broad and diverse, including convenience, organic, natural, meal solutions and more, and oftentimes, it is the right combination of

attributes that really moves the needle. And here again, individuality shines through – in the attributes themselves and the “right” combination of attributes.

Millennials and Gen Xers, today’s dominant generations, are reinforcing the urgent need for personalization and authenticity, but these trends certainly transcend generational boundaries. To meet this demand for personalized solutions, CPG marketers have shifted from form-based marketing to needs-based marketing, giving attributes – product benefits – the center-stage spotlight in today’s marketing programs (see Exhibit 1).

E X H I B I T 1

Authentic Brands Resonate in a Benefits-Based Marketplace

Premium Tea GOLD PEAK HAS:Taste that brings you home. Signature high-quality ingredients

and a distinct taste for

a delicious pick-me-up

anytime of the day.

Super Premium Tea HONEST TEA HAS:Better-for-You Benefits

• Organic• Gluten-Free• GMO-Free

Product Ingredients• Brewed Tea

Premium Positioning• Fair Trade• Recyclable

GLUTEN FREE

GMOFREE

FAIRTRADE

ORGANICUSDA

Source: HONEST

But the fragmentation of needs states is creating a challenge,

particularly for giant, trademarked brands that have strong

equities that are not necessarily well-aligned with the

latest and greatest trends. Millennials, in particular, don’t

necessarily see traditional CPG behemoths – or even mid-size

manufacturers – as effectively addressing the needs of the

day. And the struggle to stay relevant and competitive has

spurred a great deal of merger and acquisition activity across

the CPG industry. The struggle is real, and it is made even

more challenging by speed-to-market expectations. CPG

innovation has long been a costly process that is plagued

by high failure rates and, even for successful new launches,

a fairly short shelf life. Now, the idea-to-shelf cycle that used

to be counted in years is now compressed into a period of

months. Effectively competing in this high-paced, intensely

competitive marketplace requires speed and agility – and a

new product pipeline that quickly anticipates and activates

the next great market opportunity.

It’s All About Perspective…Shopper Perspective


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POINT OF VIEW


Where yesterday’s merger and acquisition activity was generally aimed at increasing efficiency and cutting costs, today’s M&A is commonly used as a tool for satisfying the innovation conundrum — how to get the right product onto the shelf quickly and with optimal marketing support in a way that will effectively drive top-line revenue growth. In these instances, manufacturers are buying the ideas that hit the mark — artisan brand, gluten-free, all natural, etc. These are high-potential growth opportunities, whether in existing or new market segments, that are allowing the manufacturer to ride the wave of the latest market trends across current and high-potential shopper segments.

To empower CPG manufacturers to move with the speed and confidence required to catch powerful growth waves, IRI employs the unique and powerful IRI Hendry Market Structure™ framework, powered by Hendry and augmented by artificial intelligence. Through this holistic, behavior-based lens, IRI’s unique Market Structure clearly illuminates high-value, white-space opportunities based on a consumer view of the market — need state and benefits — which define the true competitive set in a way that is not limited by traditional category definitions (see Exhibit 2).

An Unbiased Strategic Framework Quickly Identifies High-Value, White-Space Innovation Opportunities and Enables Market-Potential Forecasts with 90 Percent Accuracy

Extrinsic Heath

Attributes

Low Fat

Low CalorieAttributes

Convenience

Taste

Attributes

Non-GMO

Organic

Clean Label

Attributes

High Protein

Vitamins

Intrinsic HealthComfort & Stress Relief Peak Performance

E X H I B I T 2

Need State Is the Key Driver of Product Selection

SALADS YOGURT

SPORTS DRINKS

TAKEOUT

PIZZASEAFOOD

FROZEN DINNERS

PASTA

OLIVE OIL

WATER


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POINT OF VIEW


E X H I B I T 3

In over 1,900 business simulations generated during the past 12 months, the value of a behavior-based structure has consistently shone through.

0% 7% 10%

9%8% 12%

CerealOTC DigestiveHealth

Difference Between

Forecast and Actual Sales

Soup Frozen Coffee Sauces

PremiumWater

Beer, Cider, FMB

3%

Through technology and advanced analytics, this approach enables market-potential forecasts with an accuracy rate of 90 percent, as validated by IRI clients’ post-new-product-launch analyses (see Exhibit 3).

A common struggle in the M&A process is getting a true understanding of the incrementality that the acquired brand(s) would bring to the existing product portfolio — the revenue that the portfolio would not have earned without the acquired brand. Companies also struggle to understand how (or whether) that incrementality is actually sustainable, rather than just a flash-in-the-pan boost to the top line.

When pondering an M&A opportunity, manufacturers tend to rely on trends — consumer trends, company performance and category performance — to predict what will happen in the future. But today’s market is

Questions About Growth Incrementality and True Sustainability Cause Angst and Hesitation

different. Old category definitions based on traditional product forms, such as coffee, smoothies and sparkling water, simply do not represent the evolving competitive set that represents benefits, such as energy, nourishment and refreshment.

To win in this new marketplace, brands must step out of the traditional box and look across categories, departments and aisles to understand what benefits are resonating with shoppers; i.e., driving shopper loyalty. It is this broader perspective that will illuminate the next great opportunity. These are the attributes that really matter.

90%Average Forecast Accuracy


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POINT OF VIEW


Absence of Negatives

Mainstream / Mass-Produced

AON POPPresence of Positives

Craft / Artisan / Specialty

• Non-Fat

• Low Calorie

• Antioxidants

• Electrolytes

• Low Cholesterol

• Zero Carbs

• Energy

• Vitamins

With today’s shelves — brick-and-mortar and virtual — filled with products from marquis manufacturers and never-before-known start-ups, consumers have virtually unlimited choices in CPG products. In this market, though, size is no longer a competitive advantage. The fast and agile are winning the day. In fact, trends are showing that smaller, more agile players are successfully disrupting the traditional CPG arena. Since 2013, in fact, more than $17 billion in industry sales have shifted from large companies to smaller players, and small and extra-small players are growing at an average annual rate of 4 to 5 percent, compared to 1.3 percent annual growth among large players.1

The disruption is a result of myriad factors, not the least of which is e-commerce. E-commerce has leveled the playing field, allowing small firms to build

broad awareness and availability with relatively little investment. Furthermore, the face of the shopper, quite literally, has changed. The market is becoming younger, more diverse and increasingly driven by social media and other digital influences. Millennials — and shoppers in general — are much more aware of the options out in the market today, and they can quickly and easily get their hands on “just the right thing” to satisfy any need or want. And so they do.

CPG manufacturers, then, are scrambling to bring “just the right thing” to retail shelves. This requires being in lockstep with the changing needs and wants of the shopper. Being properly authentic often means elevating current offerings to provide a unique CPG experience (see Exhibit 4).

Insights Based on Actual Purchase Transactions Provide Fact-Based Perspective on Benefits That Move the Needle

E X H I B I T 4

Traditional Consumer Preferences Are Evolving and Merging, Playing a Similar Role Across More and More Categories

Mushrooms Shiitake Mushrooms

1 Source: IRI Strategic Analytics; extra small: <$100M; small: <$1B; midsize: $1B—$5.5B; large: >$5.5B sales in 2016; excludes private-label sales


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POINT OF VIEW


GLUTEN-FREE

RANCH

GLASS BOTTLES

ORGANIC

GARLIC HERB

E X H I B I T 5

Shopper-Defined Category

Dry Salad DressingSpices & Seasonings

For instance, where shoppers used to look for products that were free from negative ingredients — fat, cholesterol, carbohydrates, for instance — today’s consumers seek products that have more of “the desirable” ingredients — electrolytes, added vitamins/nutrients, antioxidants. Mainstream products are increasingly pressured by artisan and specialty solutions.IRI’s Market Structure framework equips manufacturers with the strategic insights they need to compete in this rapidly evolving CPG marketplace. This proprietary switching model is based upon unbiased shopper perspective (i.e., actual shopper behavior) and utilizes

a proprietary switching analysis that identifies what products are being purchased to satisfy the same need state across a broad, cross-category landscape. The market structure analysis also identifies specific product attributes that are pivotal in creating these need states and driving shopper loyalty, providing a more modern perspective on the competitive landscape — a look at attributes across categories that are prompting shoppers to buy. This robust and actionable market-level structure also accurately assesses market potential and ranks opportunities (see Exhibit 5).

OPPORTUNITY

OPPORTUNITY

OPPORTUNITY


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POINT OF VIEW


healthy snack occasion might look across a multitude of snack options, including granola bars, yogurt, trail mix, popcorn, etc. (see Exhibit 6). Likewise, for an indulgent experience, their consideration set would be different, including potato chips, chocolate-covered salty snacks, cookies, ice cream, etc.

Where traditional source-of-volume analyses tend to start “within” or “for” a specific category as it is defined by manufacturers and retailers, actual shopper purchase behavior clearly illustrates that shoppers look across categories, departments and aisles to solve for their needs and wants. For instance, a recent snacking market structure revealed that shoppers seeking to satisfy a

E X H I B I T 6

IRI's Hendry Market Structure Identifies the True Consumer-Defined Competitive Set

INDULGENT SNACKS• Tortilla Chips• Chips • Dried Meat • Microwave Popcorn• Chocolate-Covered

• Cookies• Ice Cream• Fruit Snacks• Pudding Cups

HEALTHIER SNACKS• Yogurt• Bars• Trail Mix• Veggie Snacks• Popcorn Cakes

• Baked Snacks• Crackers• Pretzels• RTE Popcorn• Seeds/Nuts

Identify Growth Opportunities

IRI’s Market Structure identifies key market sectors that often break traditional category definitions to clearly articulate adjacent incremental white-space opportunities. This powerful model touts three unique capabilities that maximize effectiveness and impact of M&A efforts:

Identify growth opportunities

Inform build vs. buy decisions

Refine the business proposition


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POINT OF VIEW


E X H I B I T 7

Health-Related Claims Are Important Drivers of Snack Decisions

With the proprietary Hendry machine learning-based switching analysis, the client was able to study a behavior-based perspective of which products are being purchased for the same occasion/need state across a broad, cross-category landscape. This perspective clearly illuminated

the specific product attributes that are pivotal in defining the need state and supporting shopper loyalty. In this instance, the structure illustrated that health claims (better-for-you versus indulgent) are key attributes that create separation within the snacking market (see Exhibit 7).

BETTER-FOR-YOU INDULGENT

• Chocolate Candy

• Yogurt

• Cookies

• Non-Chocolate Candy

• Potato Chips

• Nuts

• Butter Crackers

• Tortilla Chips

• Granola Bars

• Pretzels

• Protein Bars

• Dried Fruit

• Saltine Crackers

• Microwave Popcorn

• Corn Snacks

• Trail Mix

• Pies/Cakes

• Fruit Snacks

• Seeds

• Multigrain Snacks

• Rice Crackers

• Rice Cakes

• Baked Salty Snacks

• Pork Rinds

• Popcorn

• Wheat Crackers

• Chocolate-Covered Salted Snack

• Graham Crackers

• Kids Crackers

• Snack Mix

• Cheese Snacks

• Meat Jerky

• Frozen Novelties • Sandwich Crackers

• Potato Crisps


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POINT OF VIEW


This analysis identified white-space opportunities that would not source volume from the current portfolio. In other words, risk of cannibalization would be limited.

With the market reframed, IRI was able to overlay the client’s portfolio with the portfolios of potential suitors.

Leveraging powerful forecasting models, IRI was then able to rank and prioritize options by:1. Identifying sales potential of acquisition targets

2. Assessing sources of volume to confirm preliminary findings

3. Defining incrementality to the parent brand

4. Conducting pricing and spending-level analyses to assess financial feasibility of the venture

These analyses also focus on segment size and growth and shopper profile to ensure the effort aligns with corporate goals and objectives. For instance, the client may be looking at segments that are worth $25 million or more, focused on millennials, etc. By understanding the domain first, particularly its size/growth and demographic profile, the client is confident that the potential acquisition addresses opportunities that complement its current portfolios.

In this particular instance, the client decided to proceed with the acquisition of a snack manufacturer that operated across chips, trail mix, seeds and nuts, popcorn, pretzels, and veggie and chocolate-covered snacks. By acquiring the brand in question, the client was able to expand the breadth of its snack portfolio, participating in five times as many sectors across the snacking market (see Exhibit 8).

INDULGENT SNACKS• Tortilla Chips

• Chips

• Dried Meat

• Microwave Popcorn

• Chocolate-Covered

• Cookies

• Ice Cream

• Fruit Snacks

• Pudding Cups

HEALTHIER SNACKS• Yogurt

• Bars

• Trail Mix

• Veggie Snacks

• Popcorn Cakes

• Baked Snacks

• Crackers

• Pretzels

• RTE Popcorn

• Seeds/Nuts

Expand the breadth of portfolio by participating in

more categories across snacking.

E X H I B I T 8

Manufacturers Can Expand the Breadth of the Portfolio by Selectively Competing Across More Categories

Brand Participating


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POINT OF VIEW


With the white-space opportunity identified, the manufacturer then has to decide whether to build or buy the capabilities needed to tap into the pockets of growth. This involves working through a number of critical considerations — and speed and accuracy are essential to success:

• Brand loyalty — how likely are consumers to switch from their current brands of choice, and how big is the pool of potential switchers?

• Brand power — how important is brand choice in the purchase decision hierarchy, and what brands create distinct shopper need within the identified white space?

• Consumer preferences — what product attributes drive shopper loyalty?

• Opportunity cost — does potential market opportunity justify the expense of building a new brand, as compared to acquisition costs?

Inform Buy Versus Build Decision

In highly fragmented markets, for instance, distribution tends to be a weak point. Brand loyalty and brand power are often weaker, and switching behavior tends to be higher. This scenario gives a new market entrant a respectable opportunity to establish itself as a viable — and competitive — option. In a more stable market that is already addressing key preferences, in contrast, switching behavior tends to be lower because major brands are often well-established and loyalty is higher. In this scenario, winning share from established players is more difficult, making the “buy in” option more cost- and time-efficient, and thereby a more effective option.

An illustrative case study brings these considerations to life.

A national food manufacturer was looking to enter the premium sector of its existing market space — a well-established sector. The manufacturer is an established brand in the established prepared sector. Though it has a variety of prepared lines, it is not well-known for premium-tiered solutions (see Exhibit 9). To win in the premium sector, the manufacturer had to wrap new, more premium-tiered attributes into its portfolio.

E X H I B I T 9

To Enter New Segments, Manufacturers May Need to Wrap New Attributes into Their Portfolios

Prepared

Value

Mainstream

Premium

Unprepared


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POINT OF VIEW


Winning in this premium sector generally involves competing against a variety of high-demand product attributes:

• Organic: natural, no preservatives, free from pesticides, etc.

• Ingredients:

» Sustainable-approach packaging

» Fresh and simple ingredients that consumers can see and pronounce

• Artisan: chef-inspired, often international cuisine, authentic ingredients (e.g., shiitake, not plain mushrooms)

• High-segmentation retailers: Safeway, Trader Joe’s, Whole Foods, Kroger

Through an IRI Market Structure analysis, the client was able to identify and explore several possible acquisition candidates (see Exhibit 10).

Four candidates met the key consideration criteria set forth at the start of the process. One brand, though, rose above the rest throughout the market structure analysis and was ultimately acquired by the client, expanding the breadth of the client portfolio and solidifying the manufacturer’s position in the premium sector.

A B C D

1. Organic

2. Ingredients

3. Artisan

4. Retailer

E X H I B I T 1 0

Careful Assessment of Key Requirements Is Critical to Building Sustainable Incrementality

Meets Requirements Does Not Meet Requirements

Prepared

Value

Mainstream

Premium

Unprepared


12

POINT OF VIEW


Even with the best acquisition target in place, failure is possible — and even more probable — if execution is not disciplined and the definition of success is not grounded in metrics that matter. Answering key underlying business questions is a critical first step.

• How big could this initiative get with the right level of marketing support?

• What’s the optimal price point to maximize sales and share?

• Would it make sense to rebrand the acquired product portfolio under the parent trademark?

• What roles will brand extensions and new distribution channels play in maximizing the acquisition opportunity, and how?

• What is the best way to preempt post-acquisition competitive response?

Refine Business Proposition

Through modeled scenarios, IRI Market Structure-based “what-if” forecasts can quickly and efficiently zero in on these critical details, provide an accurate assessment of the opportunity potential and arm the marketing team with the insights they need to shift levers — advertising, price and distribution — to maximize sales and profit impact (see Exhibit 11).

E X H I B I T 1 1

What Is the Sales Impact from Expanding Product Distribution, Optimizing Price and Increasing Ad Spend?

Avg. Market

Potential

Reta

il Sa

les

($M

)

Ad Spend Distribution Price Acquisition Target Potential

Masked Example

$10.8

$2.9

$23.3

$6.9

$2.7

Competitive Set $3.7M Year One 62.4% ACV $13.92 Brand Avg.

Acquisition Target $5.3M Year One 72.6% ACV $14.99


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POINT OF VIEW


The CPG landscape is evolving rapidly. The old way of doing things simply will not translate into long-term growth and market success. Following that path to growth requires change. Change can be difficult, but shoppers are leading the way — as long as CPG companies are tuned in. To maximize M&A opportunities, CPG companies must step outside

The Right Lens Brings Clarity, Confidence and Success

of traditionally defined CPG categories to examine how, where and why shoppers look across categories, departments and aisles to solve for their needs and wants. Through this unbiased, strategic assessment of white-space opportunities, CPG manufacturers will carve out sustainable, incremental portfolio growth.


About IRI IRI is a leading provider of big data, predictive analytics and forward-looking insights that help CPG, OTC health care organizations, retailers and media companies to grow their businesses. With the largest repository of purchase, media, social, causal and loyalty data, all integrated on an on-demand, cloud-based technology platform, IRI helps to guide its more than 5,000 clients around the world in their quests

to remain relentlessly relevant, capture market share, connect with consumers and deliver market-leading growth. A confluence of major external events — a revolution in consumer buying, big data coming into its own, advanced analytics and automated consumer activation — is leading to a seismic shift in drivers of success in all industries. Ensure your business can leverage data at www.iriworldwide.com.

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Copyright © 2018 Information Resources, Inc. (IRI). All rights reserved. IRI, the IRI logo, and the names of IRI products and services referenced herein are either trademarks or registered trademarks of IRI. All other trademarks are the property of their respective owners.

A B O U T T H E AU T H O R S

Rebecca Gallisdorfer is a consultant, IRI Consumer and Shopper Marketing — Innovation. She can be reached at [email protected].

Anna Vishnevsky is a principal, IRI Consumer and Shopper Marketing — Innovation. She can be reached at [email protected].

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